QUESTION ONE What are the main characteristics of a bond? Provide examples of different types of bonds in terms of coupons and maturity. Explain the difference between coupon rate and yield to...

QUESTION ONE

1. What are the main characteristics of a bond? Provide examples of different types of bonds in terms of coupons and maturity.


2. Explain the difference between coupon rate and yield to maturity. Show, using examples, how changes in the coupon rate and yield to maturity affects the bond price.


3. You are asked to put value on a bond which promises 8 annual coupon payments of £50 and will repay its face value of £1000 at the end of 8 years. You observe that other similar bonds have yields to maturity of 9%.


4. How much is this bond worth?


5. You are offered the bond for a price of £755.5, what yield to maturity does this represent?


6. You believe that next year XYZ plc will pay a dividend of £2 on its common stock. Thereafter, you expect dividends to grow at a rate of 4% a year in perpetuity. If you require a return of 12% on your investment.


7. How much should you be prepared to pay for the stock?


8. Assuming that the expected stock price at the end of year 5 is £37.6, calculate the return on capital.